PEBBLEWRITER.COM IS LIVE!

Thursday, July 5, 2012

The Fork in the Road

reprinted from pebblewriter.com~

We're getting everything we anticipated on Tuesday, with the notable
exception of that 1.272 tag at 1378.20 before a reversal to 1363 [see: Going For It.]

"Note
that the 1.272 of 1378.20 is very close to the larger (purple)
pattern’s .707 of 1376.78 — lending credence to the idea of an interim
reversal there. The likely target is the Fib level around 1363 — the
larger pattern’s .618 and our previous high."

We
only reached 1374.81 instead of 1378.20. But, as we discussed Tuesday,
the close at 1374.02 (on the presumed rising wedge upper bound - purple,
dashed line) strengthens the case for the rising wedge pattern.

It's
important. While either the rising wedge or the channel could get us
to our price targets, it has huge implications for what happens next.

Rising wedges spell the end of an uptrend. Channels can go on for a long, long time. So, which is it?
Note
our price target -- the highlighted rectangle that ranges from 1389 to
1404. The channel can get there quite easily -- as early as Monday or
Tuesday of next week. The rising wedge doesn't reach those prices until
the 17th or so.

I suspect the biggest deciding factor will be the
upcoming summit of European Finance Ministers on July 9-10. There are
several issues at play.

The recent Spanish bailout announcement
boosted markets because, in a nutshell, banks would get up to $100
billion directly (asset purchases) from the ESM. Importantly, existing
debt would not be subordinated to the new debt and the ECB would gain
more control over the various sovereign central banks.

Now, with
Eurogroup/ECOFIN only a few days away, some serious problems remain with
the "solution." First, the ESM doesn't officially exist yet. As the
effective successor to the ESFS, its existence requires approval by
member states representing 90% of the capital base. So far, Finland,
the Netherlands and Slovakia (combined, about 9%) are balking. As long
as everyone else is aboard, this should not be an issue. But, if not...

Second,
Germany is balking. Not Angela Merkel, of course, but seemingly
everyone else is dead set against backstopping failing foreign
governments and banks. They are justified, as we discussed at length
when Greece was in the cross hairs. Why should Germany, with a
retirement age of 67, put itself on the line for countries whose
retirement benefits kick in at age 60?

Pulling out now would be a
no-brainer, if not for the fact that so much of the German economy
relies on its less fortunate neighbors. Sales, production, suppliers,
investment, etc -- it's a tangled web. The $64 billion question is
whether Germany would suffer more pain/expense from pulling out now or
from seeing the whole mess through to the bitter end.

Germany's
constitutional court is considering an injunction that would impede ESM
ratification. Oral proceedings are scheduled for July 10. German
Finance Minister Martin Kotthaus has been quoted as saying he doubts
whether the troika (EC, ECB and IMF) can approve the ESM by Monday.

Last,
even if the ESM survives the various challenges, will it be enough to
do the trick? Nearly 40% of the fund's capital contributions would
presumably come from Italy, Spain, Greece, Portugal and Ireland. Add in
France, and the total is closer to 60%. Can the ESM maintain its value
if 40-60% of its guarantors are in or near insolvency?

This
situation is very fluid, and has potentially devastating consequences. I
highly recommend staying on top of the steady flow of news from sources
such as Zerohedge.

about me...

I left Wall Street in August 2001 (95th floor of WT2, timing IS everything) and continue to trade for fun and profit. I hold undergrad degrees in Math and Econ, an MBA and am a CFA. Which is all to say -- I have no excuse for the miserable mistakes I often make.
This blog serves as a means to keep myself honest and my thoughts organized. It should not be construed as advice regarding any particular strategy or security.

if this blog helps you...

...please consider passing it on. Read to your kid's class instead of going out to lunch. Give blood. Take the money you budgeted for Starbucks and give it to your favorite charity.

This blog doesn't accept donations. Any revenue derived from your patronizing the companies that advertise on this page goes to a foundation dedicated to the memory of a dear friend.

The Michael J. Novosel Foundation was established to assist National Guard members and reservists with the challenges of transitioning from service back to civilian life.

Mike Novosel, MOH and his son, Mike Jr., were medical evacuation (Dustoff) pilots in Vietnam. Between them, they rescued more than 8,000 soldiers and civilians. See more about Mike and Mike Jr. here.

NOTE: In March of 2012, the new pebblewriter.com was established. It offers professional level technical analysis and research to those who don't mind paying for it. Membership information available here.